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Tisco: On African safari

Nov 28, 2001

Tisco’s stock has bounced back sharply to Rs 93 after touching a new low of Rs 67 on September 27, 2001. The scrip logged in gains of about 38% in the last two months when the BSE Sensex was up by 21%. In latest developments, Tisco has finalised plans to build a ferro chrome plant in South Africa with investment of about Rs 3 bn. The project for 120,000 tonnes per annum (TPA) will be commissioned after two and a half years (by mid 2004). The decision of the company was largely influenced by South Africa’s basic advantage of low power cost and abundant availability of chrome.

The per unit cost of power in South Africa is about 60 paise in comparison with Rs 4 per unit in India and the country has more deposits of chrome than in the state of Jharkhand where the Tata Steel plant is situated. The company aims to set up the plant on its own rather going for the joint venture. Already, it has a technical collaboration with global steel majors like Nippon, Hitachi, Posdata and Krupp.

Ferro chrome is generally used in making stainless steel. However, the company plans to directly sell the raw material instead of utilizing it in making steel. Demand for ferro chrome globally is slowing down and prices are at their lowest levels in the last 20 years. However, margins in ferro chrome project are higher than the average realizations from the company’s steel business. This could have forced Tisco to go for ferro chrome project rather than diversifying into non-core areas. Also, considering the excess steel capacity in world markets, this additional revenue stream could help Tisco in trimming the slide in operating margins.

In another development Tisco has acquired over 90% stake in Tata SSL in order to optimally utilize its cash flow. The company has decided to absorb Tata SSL, which currently has a strong foothold in downstream products (wire rods).

At the current market price of Rs 93 Tisco is trading at a P/E of 5x FY03 projected earnings. During the first half of the current year, the company reported a 78% drop in earnings and a flat revenue growth. Its operating margins declined by over 500 basis points to 17% due to subdued steel prices globally. The company’s initiatives in foraying into other related areas could help it in utilizing its cash flow and expand revenue base.

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